Does Shanghai Phoenix Enterprise (Group) (SHSE:600679) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Shanghai Phoenix Enterprise (Group) Co., Ltd. (SHSE:600679) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shanghai Phoenix Enterprise (Group)

How Much Debt Does Shanghai Phoenix Enterprise (Group) Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Shanghai Phoenix Enterprise (Group) had debt of CN¥339.9m, up from CN¥146.0m in one year. But it also has CN¥861.6m in cash to offset that, meaning it has CN¥521.6m net cash.

A Look At Shanghai Phoenix Enterprise (Group)'s Liabilities

According to the last reported balance sheet, Shanghai Phoenix Enterprise (Group) had liabilities of CN¥1.09b due within 12 months, and liabilities of CN¥119.4m due beyond 12 months. On the other hand, it had cash of CN¥861.6m and CN¥575.8m worth of receivables due within a year. So it actually has CN¥232.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Shanghai Phoenix Enterprise (Group) could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shanghai Phoenix Enterprise (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Shanghai Phoenix Enterprise (Group) grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shanghai Phoenix Enterprise (Group)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai Phoenix Enterprise (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Shanghai Phoenix Enterprise (Group)'s free cash flow amounted to 38% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shanghai Phoenix Enterprise (Group) has CN¥521.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 39% year-on-year EBIT growth. So we don't think Shanghai Phoenix Enterprise (Group)'s use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Shanghai Phoenix Enterprise (Group) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.